Why Is the Present Corporate Tax Rate Good?

Dave SchulerJuly 22, 2014

Edward Kleinbard urges us to adopt policies that end the practice of “inversion”, corporations changing countries for tax purposes:

Yet inversions are symptomatic of a corporate tax system that is highly distortionary, unstable and riddled with loopholes. The headline rate of 35% is well above world averages, effective rates imposed on investments vary wildly, and the international rules in particular are an incoherent mess. Inverting firms try to justify corporate self-help as the right response, but inversions both gut the domestic tax base and allow key players (those with international operations) to excuse themselves from the debate, while domestic firms are left holding the bag.

Thus fundamental corporate tax reform is urgently needed, but the path forward has two prongs. First, Congress should enact a temporary law to preserve the status quo, and thereby the corporate tax base, by treating inversions according to their economic substance, and by foreclosing the “hopscotch” strategies described above. Without this, there will be no corporate tax base left to reform.

Then both parties need to get serious about substantive reform, lowering the rate to say, 25%, and imposing a stable international regime that works well with territorial systems in other countries. The work Congress’s tax-writing committees did last year shows that reform is possible. Now congressional leadership needs to make it a priority.

What does present law achieve? That’s not a rhetorical question but a practical one. The only thing I can see that it positively does is help politicians by scoring brownie points with constituents eager to punish corporations and get them to pay “their fair share”, neither of which it accomplishes. That and providing a lever for securing donations from companies and their lobbyists eager to get a tax break.

Simple solution: pass a law that any US company that changes its country of residence can do no business with the US government for 20 years. Then, for fun, add that any foreign company bidding on USG contracts will have to beat the next most competitive US company by 10%.

Michael, personally I don’t think punitive measures work. They usually fail. IMO it would be much better to change the incentives so that business want to stay and move to the US because this is the best place to do business.

Unless of course it leads to what’s happening at the state level: a race to the bottom as states compete to see who can damage their state services more by cutting taxes to attract business.

We have the almost perfect laboratory experiment of Kansas and California and their personal tax rates. Kansas cut taxes and saw their deficit balloon. It’s so bad a Democrat leads the gubernatorial race by something like 7 points in the latest poll. In Kansas! Contrasted with California which raised personal income taxes and where the economy is accelerating and Jerry Brown will be re-elected by acclamation.

There’s this assumption that there’s all upside, no downside to cutting taxes. But if we cut, someone else cuts more, someone out-cuts that person, and so on, ever downward, which will eventually mean raising taxes on individuals to compensate.

It really is time to get past this crazy Republican magical thinking on taxes.

Look, if you built your company in the US, using our services, taking advantage of the stability we offer, with access to our financial structure, then decide to tell the US to drop dead so you can raise your profit margin for the benefit of a few billionaires, we have a right to tell you that you will no longer do business with our government.

When we talk about cutting corporate rates what we mean is shift the burden off the rich stockholder onto the middle class taxpayer.

@michael reynolds
It really is time to get past this crazy Republican magical thinking on taxes.

Lower taxes will not fix the economy, but neither will additional government spending.

With caveats, I tend to believe the Laffer Curve, but I know many Democrats do not. One thing Republicans do not want to admit is that taxes can be raised to the maximum, and they only need to be lowered to this point.

People and companies make decisions based upon more factors than just taxes, but there is some point that taxes “tip the scales”. Also, taxes can be a negative incentive for business formation or expansion.

I find it difficult to believe that a company is going to do better overall in a country with much larger social welfare programs than the US. I suspect it will be a case of “the grass is always greener”.

The issue on inversions is that our corporate tax system is out of step with those of France, Germany, and the UK. I used to be something of an authority on this subject but I’ve lost touch. However, in the mists of the distant past the German system did not include our byzantine depreciation rules. That encouraged more investment which would seem to me to be something we’d want to do.

We don’t need to “race to the bottom”. We just need to come into step.